How is inflation impacting travel demand and hotel rates across Europe?

No matter what industry you’re in, the record level of inflation is having a big effect on day-to-day business. The hotel industry is no exception.

A quick scan of Booking.com or Expedia and you will immediately notice the apparent impact of inflation on hotel rates. Everywhere you look in Europe, room prices are soaring. But, this rise in prices isn’t driven purely by inflationary pressures. The hotel industry is also experiencing an extraordinarily high level of demand. 

As the European travel market has returned to a period of relative normality this summer, uncoincidentally, two years of bottled-up consumer wanderlust has been released. 

In the short to medium term, with inflation continuing its upward trend to the end of the year and ease of travel returning to its pre-pandemic status quo, it’s likely that demand will remain high, and prices will continue to creep upwards. But, can we say the same for 2023? 

Using our wealth of historical, current and future looking rate and demand data, we take a thorough investigation into Europe's rate landscape, for this summer and beyond.

Inflation, rising costs and room rates

Taking a look at our historic hotel pricing data, comparing average room rates from 2019 to 2022, we can see that rates are considerably higher right now across Europe’s major cities and popular summer holiday destinations than in previous years.

If we take room prices for the month of June, for key European city destinations: Rome is up 51.4%, Berlin 50.2%, Dublin 44.5%, London 44.3%, Barcelona 29%, Amsterdam 12.1% and Paris 19.8%.

Pricing recovery destination comparison - Major European cities

There is a similar trend across Summer tourism hotspots for the month of June 2022 with Palma De Mallorca up 40%, Ibiza 30%, Aix en Provence 21%, Albufeira 20%, Montpellier 14% and Rhodes 13%.

Pricing recovery destination comparison - Popular European summer destinations

From this data and qualitative accounts from hoteliers, we can comfortably conclude that inflation and particularly rising energy costs are having a substantial impact on the hotel rate landscape across Europe.

External factors, namely economies rapidly opening up post covid and Russia’s invasion of Ukraine have put extreme strain on supply chains. As a result, there has been a dramatic rise in energy and food costs (among others), for hoteliers. 

Without putting up rates and thus increasing RevPar, hotel profit margins would inevitably drop quite substantially, and for most, to unsustainable levels.

It is also worth noting that labor costs have risen hugely for hoteliers as economies have reopened. There are now more job vacancies than people out there to fill them, meaning hoteliers are having to offer higher wages. Once again increasing their costs.

Inflationary pressure and rising costs are also coupled with the ability to price very high due to a remarkable jump in demand for lodging, without any significant supply growth since the start of the pandemic.

KEY TAKEAWAY:

Comparing average room rates from 2019 to 2022, prices are considerably higher right now across Europe’s major cities and popular summer holiday destinations - impacted by both pent-up demand and inflation.

In focus: The United Kingdom 

On a more localized scale, when we compare a number of UK destinations, we can identify a similarly common trend, with prices clearly outpacing the same months in 2019.

Again, in the month of June, London is seeing a 44.3% increase in room prices compared to 2019, Leeds 31%, Edinburgh 30.4%, Bristol 14.8%, Glasgow 14.5% and Manchester 11%.

Pricing recovery destination comparison - UK cities

By zooming in on London we can reveal that in 2022 room prices are currently outstripping 2019 by some degree. The average room price across all star ratings in London for the week commencing 20th of June 2022 is £348 and for the same date in 2019 it was £252.

London pricing recovery 2019 vs 2022 - All hotel star groups

This trend doesn’t seem to be stopping anytime soon. By examining our future pricing data, the advertised room price (dotted yellow line) for the remainder of 2022 is still hovering above the 2019 average.

Looking further ahead, in the first half of 2023 (the red dotted line), the advertised prices are tracking above both 2019 and 2022 prices.

In Edinburgh we are looking at a similar pattern, although with slightly more variation. The average room price across all star ratings in Edinburgh for the week commencing 20th of June 2022 is £268, while in 2019 it was £183. 

With our future rate data we can see that for the remainder of 2022, prices are consistently tracking higher than 2019. And once again, advertised prices for the first half of 2023 are above both 2019 and 2022 price levels.

Edinburgh pricing recovery 2019 vs 2022 - All hotel star groups

In the United Kingdom, it appears that there will be a sustained climb in room prices into 2023, but what does the future hold for the rest of Europe?

KEY TAKEAWAY:

Room prices in London and Edinburgh are currently outstripping 2019 rates by some degree and from our future pricing data this trend looks to continue in the second half of 2022 and first half of 2023.

Europe's rate landscape: A future outlook

Analyzing future pricing data in Europe we can again see that hotel rates are continuing to rise, across the board. The charts below compare price changes for future dates - up to 90 days ahead - displaying the percentage price change there has been if you look at today’s price, which in these charts is the 19th of June - versus 7 days ago. 

Viewing European city destinations, the weekly increase in prices from the 12th to the 19th of June for a date 90 days ahead is quite pronounced. Prices in Rome rose 6.7%, Berlin 4.4%, London 3%, Dublin 2%, Amsterdam 2%, Barcelona 1.5% and Paris 1.5% versus the rates in June.

Future pricing destination comparison - Major European cities

Then looking at high-season favorites in Europe there is a similar trend, albeit softer than the city destinations. Palma De Mallorca rose 3.4%, Albufeira 2.7%, Rhodes 1.3%, Montpellier 1% Ibiza 0.2% and Aix en Provence 0.02%. 

Future pricing destination comparison - Popular European summer destinations

With additional costs being passed on to guests through higher room rates, and inflation eating into consumer’s pockets, limiting their discretionary spending, you would think that consumer demand for holidays is diminishing. 

However, at the moment, that doesn’t appear to be the case. Overnight stays are recovering to pre-pandemic levels.

For now, pent-up travel demand among households who may not have been on holiday for two years seems to be outweighing the cost-of-living crisis. Consumers are willing to pay more for their holiday (and lodging), and are prioritizing holiday spending in favor of other expenditures this summer.

Our demand data reveals that OTA/meta hotel search has been climbing since the start of the year for destinations in Europe. Only with slight dips coming recently, perhaps due to large scale travel disruption, namely airline cancellations and widespread strike action. 

OTA and Meta hotel search evolution index - Major European cities

Rome and Barcelona have had over 6 fold increases in OTA/meta hotel search week commencing 12th of June, with Berlin at just over 5 fold.

From a UK perspective, each UK city in the chart below has seen over 3 fold rise in flight search to the destination since the beginning of the year. 

With Bristol and London comfortably seeing 4 times the search volume since the start of 2022.

Flight search evolution index - UK cities

Nevertheless, this period of ‘revenge travel’ isn’t exhaustible, and once it subsides and inflation starts to bite down on real incomes, hotels need to tread with caution when increasing prices.

Hotels have seen two barren years and the temptation might be to take even further advantage of this recovery. However, with inflation moving to levels usually associated with recession and consumers starting to suffer, there is always the risk of overplaying price increases. 

To combat this you need to analyze the level of consumer price inflation in your top feeder markets to calculate the level of price increase that will be acceptable to optimize revenue. 

For example, if we look at London and Edinburgh once more, we can see that the highest proportion of hotel searches are domestic. Perhaps showing early signs of the effect of inflation on consumers. Not only on their own discretionary income but being put off by the cumulative rising cost of international flights, lodging, car rental etc.

London hotel search - Top 5 countries searching

Edinburgh hotel search - Top 5 countries searching

42% of all hotel searches for London are from within the UK and in Edinburgh this stands at 73%.

For both London and Edinburgh the United States is the second largest feeder market in terms of hotel searches. Having a relatively high travel spend per-person, this could be a good market to target with marketing activity. But with the rate of inflation in the US recently reaching 8.6%, its highest point since 1981, it's still sensible to be cautious about increasing room rate.

Germany and Italy currently have rates of inflation hovering above 7% - healthier than both the US and the UK. These markets have more potential when it comes to price changes and targeted marketing activity.

Once you know your best feeder markets in terms of consumer consumer price inflation you can use forward-looking demand intelligence to see which of these markets has strong existing demand and deliver targeted marketing campaigns, honing in on guests most likely to book.

At this point it may also be wise to put greater focus on promotions, discounts and a range of non-price levers which offer value to guests. It is also likely that we will see more enticing deals to book early, as pent-up demand begins to diminish.

KEY TAKEAWAY:

Prices are climbing all around Europe with no real outliers, driven by inflation, rising costs, and pent-up demand.

This extraordinary level of demand doesn't seem to be slowing any time soon, but it isn't everlasting. When inflation hits consumers hard, later in the year, hoteliers should tread with caution when increasing prices and examine inflation levels in feeder markets closely. 

Can economic history give any clues as to how inflation and Europe's hotel industry will fare in the future?

Traditionally, consumers often forgo travel when faced with a high cost of living, but, as mentioned previously, pent-up demand, along with consumer savings over the pandemic and delayed trips, is offsetting this. For the time being. 

As we move into Q4 2022 and 2023 we could see a change in travel behavior as real incomes are squeezed further by inflation.

Pessimistic consumer sentiment may prompt households to hold off from tapping into excess savings as an offset to high inflation. Thus, consumers could start reducing the number of trips they take or start combining trips where possible. We may even see a further rise in the popularity of ‘bleisure’ travel.

As a consumer you will ask yourself where your money can stretch the furthest. This could mean a shift in source markets with consumers searching for perceived value elsewhere. Perhaps in a continuation of the trend we saw during and post-pandemic, consumers will eschew longer haul, higher cost trips for regional and domestic travel. 

When we look at our hotel search source market data we can see that domestic searches still dominate for a number of destinations (although, this may still be a hangover from pandemic orientated travel).

Berlin has 69% of all hotel searches from within Germany, Rome has 50% from within Italy.

Berlin hotel search - Top 5 countries searching

Rome hotel search - Top 5 countries searching

Those who do end up traveling will probably reallocate their spending. They might opt for more budget friendly alternatives when it comes to accommodation and look into short-term rental options. 

Additionally, there will be reductions in spend on food and beverage, retail purchases while on holiday, and ancillary services at the hotel.

Historically, one area of the industry that is resistant to economic shocks is the luxury segment. The archetypal guests of luxury properties will continue to travel and pay the higher prices for their rooms, due to a lack of real change in their spending power.

KEY TAKEAWAY:

Historically, rising inflation curbs consumer spending on travel. Right now, high demand is propping up the market. But, we may see changes in travel behavior as consumers seek out where their money will stretch furthest. Source markets will likely change - as we speak domestic travel across Europe is still very strong.

What about the state of corporate travel?

With such high consumer demand, hoteliers are currently able to pass the cost of inflation on to their transient rates with relative ease, which mitigates the burden on corporate rates, but this can’t last forever.

Consumer demand will inevitably dampen and you will need to have a concrete understanding of your updated wish, want and walk rates to maximize room revenue from key accounts. 

When you are looking to negotiate higher corporate rates - more in line with inflation - you should also build in flexibility around your offer. Include ancillary benefits to make it more attractive, such as breakfast included.

Luckily, from our data we can see that corporate travel is making a gradual comeback. We are also noticing more companies increasing their spend on business travel and allowing employees to travel internationally, likely due to healthy corporate balance sheets and two years without meetings and events. 

Therefore, as we move through 2022 there may be a little more room for negotiation with corporate accounts than first anticipated at the start of the year.

Taking a look at Global Distribution System searches, which gives a good indication on the state of corporate (and wholesale travel) - if we compare now to the start of the year for Europe’s leading financial centers, there is definitely marked growth. 

Amsterdam with an 11-fold increase, Zurich 9, Frankfurt 8.3, Paris 5.6, London 5.2 and Madrid 3.7.

GDS Hotel search evolution index - Major European financial centers

With a business intelligence tool at your disposal you can better understand the business mix at your hotel and then by analyzing the data you can judge who you think is still willing to pay higher prices, such as an SME or multinational business account.

This type of tool can also determine the country of origin of corporate travelers to match up with feeder country inflation levels. As well as the historical profitability of each account which will help when entering negotiations and deciding which accounts to pursue.

KEY TAKEAWAY:

Corporate rates are more difficult to raise to the level of inflation - it is key that you build flexibility into your offer and fully understand your business mix. Corporate travel still lags behind consumer demand but it is making a slow but steady comeback in Europe.  

How long will the current rate landscape last?

It's the million dollar question that unfortunately no one has a definitive answer to.

There is an expectation that inflation and the high prices will remain elevated for some time yet. As long as supply chains are disrupted, Russia continues in its invasion of Ukraine, and the labor market remains undesirable for employers then the current state of play will remain. 

Currently, UK inflation is at the highest level since March 1982, when it also stood at 9.1%, and the Bank of England has warned it will reach 11% this year. But, it also predicts inflation will come back down to be close to 2% in about two years. 

With GDP growth slowing, other more negative forecasters warn that we are heading into a full blown recession and inflation unlikely to get back down to the 2% target for many years to come.

For now, tourism spending has had a smaller sensitivity to real income changes, bolstered by pent-up demand. Thus, we will see higher room prices continue into the near future. However, after a year of high inflation and real-income declines, this demand will eventually fade. 

At that point more than ever you will need the best market and rate intelligence to accurately forecast demand for your region and set appropriate pricing strategies to drive revenue.